Indictments Could Come in UBS Offshore Inquiry

Lynnley Browning, The New York Times

Tuesday, 11 Nov 2008 | 3:25 AM ETThe New York Times

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A federal investigation into UBS concerning its sale of offshore private banking services to wealthy Americans is concentrating on senior and midlevel executives and bankers, and could result in one or more indictments, people briefed on the matter said on Monday.

Investigators are sifting through more than 70 names and related account details of American clients provided by UBS over the last few months to the Justice Department, which has passed the details to the Internal Revenue Service for further scrutiny. The Justice Department and the I.R.S. plan to build both civil and criminal tax-evasion cases against some of the clients, these people said.

The developments put new pressure on UBS, the Swiss banking giant, which is struggling under heavy subprime losses, and on Switzerland’s centuries-old tradition of banking secrecy. The tradition is being intensely scrutinized by the United States and Europe to determine if it helps clients evade taxes illegally.

Amid the credit crisis propelled by the subprime collapse, the Swiss government has extended to UBS a $60 billion bailout and taken a 9 percent stake.

Prosecutors suspect that UBS, which is based in Zurich and has extensive operations in the United States, illegally helped American clients hide $20 billion in secret offshore accounts, thereby evading $300 million a year in taxes from 2000 to 2007.

While tax evasion is legal in Switzerland, it is not in the United States, a difference that has put the bank at odds with American regulators and authorities. UBS no longer offers the services, which it calls cross-border private banking services for United States clients.

The Justice Department has not yet determined how it will handle its criminal investigation of the bank itself. The most severe outcomes could include an indictment, a deferred-prosecution agreement or a plea by UBS of wrongdoing. The Securities and Exchange Commission is also investigating the bank, which owns Paine Webber, over possible violations of securities laws.

In a shift, both the Justice Department and the I.R.S. are pursuing audits of the American clients while the criminal investigation into UBS unfolds. While the agencies recently acquired the power to do both simultaneously, they have not traditionally done so. The I.R.S. and Justice Department declined to comment on Monday.

The scrutiny of UBS could potentially put pressure on the bank through the Federal Reserve, which controls special credit lines to banks through its emergency-lending window, according to the persons briefed on the private banking investigation, who spoke only on the condition of anonymity. They declined to comment further.

UBS disclosed in third-quarter financial statement on Nov. 4 that “the investigations are ‘focused on the management supervision and control of the U.S. cross-border business and the practices at issue.’”

In its most recent quarterly filing, UBS said that Robert M. Morgenthau, the New York district attorney, had issued a subpoena to the bank for the names of all United States clients who carried out wire transfers from their UBS accounts based in America to their UBS accounts based in Switzerland in recent years. The 70 names that UBS turned over were covered under that subpoena.

“We have not breached Swiss banking confidentiality,” said Karina Byrne, a spokeswoman for UBS, adding that the bank had not provided what she said was “Swiss-based client data.”